Yen Depreciation Dilemma: USD/JPY Hits 157.89, Economic Stimulus Plans Intensify Exchange Rate Pressure

The Japanese yen has recently continued to weaken, becoming a market focus. As of November 20, USD/JPY( rose to 157.89, hitting a new high in nearly ten months and just one step away from the key psychological level of 160. The Japanese authorities have previously intervened multiple times around the 160 level, but the market believes that unless the Bank of Japan takes substantial action, breaking through 160 is an inevitable trend.

Japan’s proactive fiscal policy is fueling the decline. On November 21, the Japanese Cabinet approved an economic stimulus package totaling 21.3 trillion yen, the largest additional expenditure plan since the pandemic. The largest spending item is price relief, amounting to 11.7 trillion yen, aimed at addressing rising price pressures. The funding for this plan will be raised through increased tax revenue driven by inflation and new government bond issuance. It is expected to receive Cabinet approval as early as November 28, with the goal of completing parliamentary review before the end of the year.

Following the policy announcement, market reactions were swift. The yield on 10-year Japanese government bonds rose to 1.842% on November 20, the highest level since 2008, reflecting investors’ concerns about Japan’s long-term fiscal health. The massive expenditure plan, combined with a continued loose monetary environment, has created a perfect storm for yen depreciation.

Bank of Japan Governor Ueda Kazuo is closely monitoring exchange rate movements. He pointed out that the yen’s weakness is further boosting inflation expectations—imported goods are rising in price due to exchange rate depreciation, prompting companies to raise wages and product prices. Ueda Kazuo emphasized that the transmission effect of exchange rate fluctuations on prices is more pronounced than in the past, and the central bank must remain vigilant. This statement hints that the possibility of a rate hike in December is increasing.

Market opinions on the outlook for the yen vary. ANZ Forex Strategist Rodrigo Catril believes that history shows that market interventions alone, without accompanying monetary or fiscal discipline, only create opportunities for yen short-sellers. He expects that if the central bank decides to raise interest rates, USD/JPY could fall back below 150; conversely, breaking below 160 is inevitable. In other words, the future direction of the yen exchange rate largely depends on whether the Bank of Japan is willing to raise interest rates in December and whether the Japanese government can demonstrate a commitment to fiscal discipline.